The microsimulation toolkit of the Council for Budget - PowerPoint PPT Presentation

The microsimulation toolkit of the Council for Budget Responsibility Zuzana Siebertová & Norbert Švarda FISK-Workshop Vienna, October 29, 2019

Part I BACKGROUND

Microsimulations at Fiscal Council ? Mandate of the CBR Draw up its own opinions on the legislative proposals submitted to the Parliament Current situation (budget proposal 2020-2022) Proposals changing both tax and social system: decrease tax revenues or increase public expenditures • increase of basic tax allowance • decreased tax rate for corporate tax and for the self-employed • decreased VAT for the selected food items • increase of parental allowance

Background Evaluating suggested policy measures requires a tool that • Captures national policy environment in fine detail • Is based on good quality and well-adjusted micro data • Generates outcomes that provide a good match with administrative data on aggregate The CBR’s microsimulation tool aims to cover mentioned issues

Simulation model at a glance w_hat if model (1) SIMTASK: static tax-benefit calculator • Simulation of direct taxes and transfers • Linked to indirect tax simulation module • Runs on SK-SILC data (2) Labour supply model (3) Integrated into a general equilibrium macro model w_hat if is an analytical toolbox that can be used for • Evaluation of counterfactual tax and transfer system changes • Costing of government reform proposals

Part II OUR APPROACH

Data & SIMTASK Re-weighting of the underlying micro-data More detailed control of selected categories • income distribution • children-age cohorts Microsimulation tool SIMTASK Runs on SK-SILC Inspired by EUROMOD: tailored to country-specific conditions Involves a maximum degree of user control — > can be incorporated within other models used by Slovak CBR New approach improves the fit between simulated output and official statistics

SIMTASK: Slovak Tax-Transfer Microsimulation Model SIMTASK simulates for every individual and policy scenario Personal income tax Social and health security contributions paid by employers, employees and self-employed Social transfers • Family related transfers: child birth grant, child benefit, parental allowance • Social assistance: material need benefit • Unemployment benefit Net income VAT paid by households is simulated in a separate block

SIMTASK How does it work ? Households ’ Rules for income, taxes, taxes and contributions, transfers social transfers Basic scenario Basic scenario Impact on SIMTASK (core) public finance, Data SK-SILC Simulation of net income of income inequality, adjustments micro individuals and households net income of data calibration according to scenario individuals and households Households ’ Rules for income, taxes, taxes and contributions, transfers social transfers Reform scenario 9 Reform scenario

Model of labour supply Extensive margin response Method to assess how the tax-benefit system affects motivation to work Participation decision of individuals on the labour market is examined by comparing two states: Being economically active vs. Being inactive Probit model for economic activity Estimated as a pooled regression 2012-15 separately for males and females Most responsive groups were found females and low-educated

Labour supply model (contd.) Intensive margin response Change in hours worked It can be expressed as a function of net-of-tax rates, marginal and average elasticities Response calibrated based on estimations for Hungary (Kiss and Mosberger, 2015) Marginal net-of-tax rate elasticity 0.2 for top 20% earners

Macro model Neoclassical model General equilibrium model CES production function for firms combines capital and labour Capital supply is very elastic (small open economy) Labour supply comes from micro block Interaction with the micro part Aggregate labour supply schedule is based on individual decisions coming from empirical decision functions Combines empirical work with calibration A number of macro model parameters calibrated in line with external data and literature

How does w_hat if work? Micro block For baseline and scenario compute net wages (observed/predicted for employed/unemployed) and transfers (if employed/inactive) using SIMTASK For baseline and scenario evaluate probability of being economically active/employed and effective hours worked (if employed) using elasticities Effective labour supply shock is the sum of individual adjustments at extensive and intensive margin Macro block Labour supply shock from micro part enters to macro block Macro block generates new wage shock Model solution New wage shock feeds back to micro block and process repeats until convergence

Interpretation of results Presentation of policy simulation results • Direct output from the model Simulated scenario compared to baseline (% change ) Pros: Results document channels and relations in model Cons: Questionable correspondence to economic reality • Re-scaling of the results Simulated baseline outcomes from the model are compared to the official statistics Scaling coefficient: ratio of the official statistics to simulated outcome from the model Pros: Quantification of effects Cons: Imprecision 14

Interpretation of results: Scaling coefficients Consolidation Scaling Source of the official statistics for 2018 instrument coefficient Personal income tax 1.17 Committee for the tax forecasts (Ministry of Finance) Social and health 1.04 Committee for the tax forecasts (Ministry of insurance Finance) contributions Social transfers 1.07 Information system on Government Budget Committee for the tax forecasts (Ministry of Value added tax 1.97 Finance) When scaling the VAT, only the part paid by households is taken into account. Note: Scaling coefficient is given as the ratio of the official statistics to simulated outcome from the model. Official statistics for every consolidation instrument is a forecasted value.

Interpretation of results: Case of VAT Total cons. 0% 10% 20% VAT paid (1) Final consumption of Share of VAT private households 35 310 9 760 861 24 689 5 024 paid by (1): 87% (2) Public sector consumption 2 565 392 102 2 071 424 (3) Gross fixed capital formation 1 400 1 1 399 280 … … … … … … TOTAL (sum of all components) 56 340 20 976 1 141 34 223 6 959 Source: Statistical Office SR, 2015. Amounts in mil. € 16

Part III COSTING OF RECENT REFORM PROPOSAL

Reform costing: VAT reduction on food in 2020 Reform proposal: reduction of VAT on selected food items from 20% to 10% VAT rate 0% 10% 20% 0% 10% 20% Expenditure categories Baseline 2020 Scenario (1) Food and non-alcoholic beverages - 16 84 - 87 13 (2) Alcoholic beverages and tobacco - - 100 - - 100 (3) Garments and shoes - - 100 - - 100 (4) Electricity and other fuels 19 - 81 19 - 81 (5) Household services - - 100 - - 100 (6) Health 47 40 13 47 40 13 (7) Transport - - 100 - - 100 (8) Communication 29 - 71 29 - 71 (9) Recreation and culture 9 13 78 9 13 78 (10) Education 100 - - 100 - - (11) Restaurants and hotels - 50 50 - 50 50 (12) Other goods and services 54 - 46 54 - 46 Durables 2 - 98 2 - 98 Total 14.1 7.3 78.6 14.1 21.1 64.9

Reform costing: VAT reduction on food in 2020 Evaluation of the proposal in our simulation framework: • Monetary values (labour income, transfers) are uprated to 2020 values (forecasts) • Baseline results are re-scaled to match the official statistics (forecast) • The effect of the change is the difference between scenario and baseline values Estimated costs of the reform proposal: 467 mil. eur lower VAT revenue, negative impact on the balance of 0.5% GDP.

Distributional impact of the reform on households VAT revenue dropout VAT saved (share of disp. income) in mil. € , in % in € , in % 6.3 7.5 8.7 9.9 11.1 11.8 12.8 14.4 15.2 16.1 59.6 62.2 66.0 25.8 30.7 35.7 40.6 45.5 48.4 52.5 5.5 6.6 7.6 8.7 9.7 10.4 11.2 12.8 13.3 14.1 1.7 1.4 1.2 1.1 1.0 0.8 0.7 0.7 0.6 0.4 Note: Numbers on x-axis denote upper border of households ’ monthly disposable income Households would save on average 0.7% (11 eur) of their disposable income monthly. Households in top income decile would save 2.5 more than low income households.

Part IV MAKING THE TOOL ACCESSIBLE

Online tool SIMTASK on web • on-line version of the simulation model • tool to assess immediate fiscal and distributional effects of reforms, impact on inequality • targeted to public: analysts, journalists, students available at http://simtask.rozpoctovarada.sk

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